Antitakeover Defenses and Voting Related Issues

As unfriendly takeover activity began to rise in the 1980s, managements sought refuge from unsolicited offers by adopting various antitakeover devices designed to make takeovers prohibitively expensive for the bidder. To further insulate management, corporations sought to limit shareholders' ability to vote. In many cases, boards unilaterally enacted such measures without providing shareholders a voice in the process. States also assumed a role by adapting takeover defense laws or statutes, competing with each other to become the most attractive corporate haven. Most companies now have an arsenal of defenses in place and, in response, shareholders are increasingly filing proposals to dismantle these defenses.

The debate concerning these defenses centers on whether they enhance or detract from shareholder value. Proponents argue that a company's board, when armed with these takeover protections, may use them to negotiate and obtain higher takeover premiums from potential acquirers. According to this position, these devices protect the target company and provide it with negotiating flexibility which benefits shareholders in the form of financially fair tender offers.

The opposing viewpoint maintains that managers afforded such protection are more likely to become entrenched than to actively pursue the best interests of shareholders. Such takeover defenses serve as obstacles to the normal functioning of the marketplace which, when operating efficiently, should replace poorly performing managements.

The key to the issues discussed in this section is that they all serve to enhance the power of management at the expense of shareholders. The transfer of power from shareholders to the corporation is the most troubling aspect of these mechanisms. Shareholders' exercise of their right to vote on matters presented in a company's proxy statement is a cornerstone of corporate governance and specifically of corporate accountability to owners.

However, these issues should be analyzed on a case-by-case basis, taking into consideration the corporation involved, its overall governance structure, and the situation being examined. The question to be answered is whether the action guards against an unreasonable takeover offer or is merely a management entrenchment device. There are times when antitakeover provisions may be the most prudent course of action, although generally corporations enact such provisions as an entrenchment device when no threat is imminent. ISS's guiding principles regarding the adoption of such proposals or shareholder calls for their removal are as follows:

Shareholder approval: Since investors suffer a diminution of power as a result of the adoption of antitakeover proposals, only shareholders should have the right to give this power away. Therefore, corporations desiring change should include these proposals on the proxy statement, with enough detail so shareholders have sufficient knowledge about the proposal to make an informed choice.

Fairness of the voting process: An open voting process gives shareholders reasonable access to the proxy ballot and a significant voice in proxy decisions. This includes, among other items, support of confidential voting and opposition to supermajority vote requirements and bundled proposals.

Shareholders' right to act: The board should not limit the ability of shareholders to act outside of the annual meeting called by directors. This limitation can severely curtail shareholders' attempts to replace a poorly performing or unresponsive board.

Bundled proposals: Bundled proposals often combine an unpalatable proposal with one that is expected to enjoy widespread shareholder support in order to enhance the possibility of passage. ISS believes shareholders must determine their vote based on the aggregate effect of the items. Those items with an overall positive effect should be supported.

This section focuses on management and shareholder proposals regarding antitakeover defenses and also takes a look at the openness of the company's voting process. We consider several corporate governance and proxy voting provisions which, through their existence or absence in a company's bylaws or charter, can greatly influence the extent to which a company's shareholders have a meaningful voice in the relationship with their management and board of directors.